Salary Sacrifice
An arrangement where you give up part of your salary in exchange for a higher employer pension contribution.
Salary sacrifice is an arrangement between you and your employer where you agree to reduce your contractual salary in exchange for your employer making a larger pension contribution on your behalf. Because the contribution comes from your employer rather than from your net pay, it is made before income tax and National Insurance contributions are calculated. This means both you and your employer pay less National Insurance, making it a tax-efficient way to boost your pension.
For example, if you sacrifice £100 of your monthly salary, you save both income tax and employee National Insurance on that £100. Your employer also saves on employer National Insurance and may pass some or all of that saving into your pension as well. The combined effect can make salary sacrifice more efficient than making personal pension contributions and claiming tax relief in the usual way.
There are a few things to be aware of. Reducing your salary on paper could affect your entitlement to certain state benefits, statutory pay (such as maternity or sick pay), and the amount you can borrow for a mortgage. Your salary after the sacrifice must not fall below the National Minimum Wage. Not all employers offer salary sacrifice, so it is worth checking with your HR or payroll department to see if the option is available to you.